Donald Trump surprised everyone but his supporters Tuesday night with a solid victory over Hillary Clinton.
Clinton was widely viewed as the preferred candidate for Wall St. and, as a result, financial markets across the globe have braced for higher financial market volatility in the coming weeks and months.
As of writing, Trump has earned 279 Electoral College votes, well above the 270 needed to win. Furthermore, Republicans will continue to control the Senate, as they have already secured 51 seats, and the House of Representatives, giving them reign over the U.S. government. We cannot predict the future, but it is clear there will be dramatic policy shifts coming.
Impact on fiscal policy
As of today, Trump's fiscal plan is vague and doesn't add up to many economists, as he promising huge tax cuts that may boost the U.S.'s deficit to 6%-7% of gross domestic product. He has also promised to boost defense and infrastructure spending. Where that funding will come from remains something of a mystery.
Some interesting elements of Trump's policy include:
Simplified tax code 10% tax to repatriate corporate profits from overseas, which could bring money back into the U.S. Reduce corporate tax rates … and all business income taxed at 15%
Health care spending will be back on the table as the Affordable Care Act ("Obamacare") will likely be repealed. At the end of the day, Trump's fiscal plan will likely be smaller than promised.
What about the Fed?
For a few moments this morning, futures were down and it looked like the U.S. Federal Reserve Board ("Fed") would delay an interest rate increase. Trump's consolatory speech, however, reassured markets.
There could be a quick market decline and rebound over the next few days, like the one that followed the U.K.'s vote to leave the European Union ("Brexit") in late-June 2016. If markets return to the status quo, the Fed could follow through with a planned interest rate increase before 2016.
Trump took a strong stance on tariffs with China and a stronger stance on immigration with Mexico. We'll soon find out whether or not that was political posturing or the foundation of future policies from a Trump administration.
What seems true is the fundamental shift in the U.S. attitude toward free trade. The Trans-Pacific Partnership ("TPP") is likely dead in the water. And nations around the world will be watching closely to find out if the U.S. will collapse other trade deals. That is unlikely, and it is doubtful that the U.S. will become deeply isolationist.
Trump's impact on financial markets will be pretty clear, as his behaviour will directly impact market returns in the coming years. Investors will now be asking themselves: Was Trump's statesmanlike speech on election night an act or is it indicative of the president he will be?
Since Trump and his current team are inexperienced, who Trump puts in cabinet will be very important. To keep markets steady, he will need to put together a team of highly experienced politicians for his administration.
Between now and January 20, 2017, there will be lots of speculation as markets wait to see what the new U.S. government will look like. There will likely be significant volatility along the way.
Impact on Canada
Canada is a key part of the North American Free Trade Agreement ("NAFTA"), and Trump has talked about redefining that trade agreement's terms. His concerns, however, were focused squarely on Mexico. Canada is a large supplier of oil and natural gas to the U.S. and, as such, Canada should remain in a fairly strong position.
Although it is too hard to predict what will happen with regard to NAFTA, it is likely that Canada will not be as negatively impacted by Trump's policies as Mexico and China.